To neutralize an equity position from changes in the stock price, using European options, should you: A) Sell put options B) Sell call options C) Buy put options
C - if the stock price falls you would lose on the equity pos and gain on the put position.
I think it’s B, but not sure what the diff wld be to C
If you’re delta neutral hedging then you are selling call options. # Shares/(delta)
sure, but can’t you get the same result with C?
Yes, but then you wouldn’t be delta hedging. You are trying to hedge against the change in the underlying stock price. The question doesn’t say which way the stock is moving.
Sure you would, long put options have negative delta, if the stock moves down your put becomes more valuable to offset the stock loss and if the stock moves up the put becomes less valuable to offset the gain.
Chuckrox8 Wrote: ------------------------------------------------------- > Yes, but then you wouldn’t be delta hedging. You > are trying to hedge against the change in the > underlying stock price. The question doesn’t say > which way the stock is moving. I cant see where delta hedging has to be dealing with calls (seling calls on an equity position). puts have a negative delta…seems like a great way to hedge an equity position. What am I missing here?
Only guess is that it’s more efficient to sell calls and get the premium instead of payout for long puts. but that should be arbed out…or maybe it has something to do with the fact it’s european options? or the question is wrong.
i think this question is missung stuff, is there any more to this Sand? You can hedge any position with a either a call or a put. The only difference is the number of options used and whether you are long or short. normally a question like this would have different number of options amounts listed, and only one would be properly hedge with the right amount of options.
Yeah, numbers are removed since I wanted to see what people thought about the concept. I agreed with Ro424 that it could be C, but QBank said it was B. What I don’t understand is why this makes sense from the stock owners perspective. I understand why you would buy a put to lock in a price. Any extra price appreciation you get on the stock could only be a positive thing. If you sell calls you are putting a cap on your price appreciation, but you are still exposed to downward price movements in the stock. Why would you do that? Am I misunderstanding something? For reference: 200,000 shares Deltas: Call = .5977; Put = -.4023 Answers: A) Sell 334,616 put options B) Sell 334,616 call options C) Buy 300,703 put options
Well with the numbers, the only correct answer is B
My first reaction was to go for the protective put - i.e. buy the put to protect against the equity downside. The question is feeble, because it says nothing about delta hedging, though the title does. Assuming you are delta hedging it has to be call options, I reckon - in this case selling. The reason is that the between the option and the stock one of them has to cost money and one of them has to provide it - that’s the nature of the hedge. If you’re buying stock, feed it by selling calls. It isn’t arbitrage if you only make outlays, and the delta hedge is a form of imperfect arbitrage (rather than a downside hedge, for example). In arbitrage you print money, you don’t simply invest well - the idea is that any clown with no money but a good idea can mint it. The guy who buys the stock and the put came in with money, and has protected himself from a price drop. The guy who spots a mispricing in the call vs the stock, sells one, buys the other, hope his hedge will hold and pockets the difference. Unfortunately, gamma is lurking around the corner, and if he (or “she”, as CFAI like to say) isn’t constantly adjusting he can get into trouble.
Lol i knew it,
Yeah, the numbers make it MUCH clearer. The math on C doesn’t come out right and A wouldn’t make sense.
Ok so we can all agree on the proper answer, but here is something… Can an investor create a delta neutral portfolio by buying shares and buying puts? Simple question right?? I think yes, but lmb and chuck have me thining otherwise. Ignore the numbers in this ?..just the concept of delta neutral using shares and buying puts.
If we were going to do the math, would the put hedge come out to “sell 497,141 put options?”
Yes, there are many other ways to delta hedge. I believe L3 goes deep into this concept.
rolo550 Wrote: ------------------------------------------------------- > If we were going to do the math, would the put > hedge come out to > > “sell 497,141 put options?” Thats what i got… Thanks chuck…just wanted to make sure i wasnt way off
200,000 shares Deltas: Call = .5977; Put = -.4023 Answers: A) Sell 334,616 put options B) Sell 334,616 call options C) Buy 300,703 put options **** You are hedged up to a point. At what price would your hedge breakdown?